Oil Prices Tumble Nearly 8%

Worries over China, Greece and Iran pressure crude prices

Oil prices on Monday skidded to their biggest single-day declines in more than three months, as gyrations in Chinese stocks and the prospect of more crude from the U.S. and Iran revived worries about the global supply glut.

A view of a petrochemical complex in Iran’s Assaluyeh port. Iran wants to double its oil exports to 2.3 million barrels a day after sanctions are lifted.
Photo:
Reuters

These elements have taken on major importance as investors try to sort out whether the global oil market has rebalanced from a historic collapse. Prices fell nearly 60% after rapidly growing production from the U.S. shale boom overwhelmed the market. They rebounded by a third and stabilized throughout the spring as some investors bet that spending cuts would curtail production, but the latest leg down comes amid more signs that those expectations aren’t turning into reality.

The fall started late last week as U.S. producers said they wanted to ramp up production and data showed them adding drilling rigs to their fields for the first time since December. Iraqi production also turned out to be larger than expected, and data showed production across the Organization of the Petroleum Exporting Countries rising throughout June, analysts said.

“Even without additional Iranian barrels, there is already too much oil,” said Tim Evans, analyst at Citi Futures Perspective in New York. “We may have tipped the balance in the market.”

The U.S. benchmark oil price slid for the third session in a row, closing down $4.38, or 7.7%, to $52.53 a barrel on the New York Mercantile Exchange. Monday’s losses are the biggest in percentage terms for a single session since February, though they also included declines during limited electronic trading on the Friday holiday.

Nymex crude settled at its lowest level since April 13. The losing streak cut prices by 12%, the biggest three-session fall since late November.

Brent crude, the global benchmark, closed down $3.78, or 6.3%, to $56.54 a barrel on ICE Futures Europe. Brent had its biggest one-day dollar decline since Nov. 27 and its biggest one-day percentage decline since Feb. 4. Its settlement was the lowest since April. 8.

“It’s the day I’ve been waiting for for three months,” said Todd Garner, managing partner at hedge fund Protec Energy Partners LLC, which manages $100 million of energy investments in Boca Raton, Fla. Mr. Garner is betting futures, largely for September, will fall back to $49 a barrel.

Mr. Garner and others said the spring rebound was based on a false premise. Money managers began adding to bets that oil prices would rise in the winter as U.S. producers started making drastic cuts to the number of working rigs, taking them to their lowest point in nearly five years. The bet was that production would follow or at least hold steady, which hasn’t happened. Last week, U.S. figures showed an increase in crude-oil stockpiles for the first time in nine weeks.

Money managers cut their bets on rising oil prices and added to bets on falling prices in the week that ended June 30, according to regulatory data released Monday afternoon. Money managers had a net 216,152 bullish positions on oil futures, the smallest number since March.

“I still think production is going to increase,” said Mark Waggoner, president of brokerage Excel Futures. “There’s a whole gambit” of bad news for oil Monday.

Oil prices had stabilized at around $60 a barrel for two months, a period so calm that many investors had left the market to see what would happen next. Now that prices have broken lower, the selloff is likely to deepen and could head back to just below $50, the last point they stabilized at in February, Mr. Waggoner said.

Capital Economics lowered its year-end price forecast by more than 8%, it said in a note titled “All signs point south for oil prices.” It said U.S. oil is likely to end the year at $50 a barrel and Brent at $55.

The Chinese government over the weekend halted all new initial public offerings and the central bank is expected to help investors buy equities, The Wall Street Journal reported. The turmoil in Chinese stocks is another sign of the wrenching economic transformation that is under way there. For investors, the concern is that the Chinese government may struggle to contain the problems, broadly slowing growth and demand for oil along with it.

The victory for the “no” vote in Greece’s referendum on Sunday also has prolonged the uncertainty in global crude-oil markets. Greeks overwhelmingly voted against their international creditors’ conditions for further bailout aid, increasing uncertainty about Greece’s future in the eurozone.

The trouble pushed investors out of the euro and into the dollar, with the WSJ Dollar Index up 0.2% Monday. Because oil is a dollar-denominated commodity, a stronger dollar often drags prices lower.

These factors could drag oil down for a few months, but the market is likely facing a shortage of supply by next year, said
Dimitry Dayen,
senior research analyst at ClearBridge Investments, which manages $117.8 billion in assets. Mr. Dayen said he is sticking with his call for $75 oil in 2016.

“There’s going to be volatility. There’s going to be oversupply,” he said. “However, [it is] important to keep in mind that sub $50-$55 oil is not going to be sustainable.”

In refined products, August gasoline ended down 11.06 cents, or 5.4%, at $1.9237 a gallon on the Nymex, while August diesel lost 13.10 cents, or 7.1%, to $1.7089 a gallon.